Ebury: Dollar ‘getting harder’

By Enrique Diaz – Alvarez *

In a somewhat incomprehensible development, the dollar is struggling so far in 2022, although US bond yields are rising and the market has discounted the US Federal Reserve’s interest rate hikes and expects more. Last week, the dollar sold out against every major currency except the Russian ruble, which has been plagued by concerns about escalating tensions in Ukraine. The dollar managed to recover some of its losses on Friday amid a new sell-off in bonds, but it is too early to say whether the traditional relationship between rising US yields and a stronger dollar is beginning to be reaffirmed.

Inflation news flows continue to dominate the climate and financial market headlines, including the United Kingdom (Wednesday) and Japan (Friday). There are also many central bank meetings. Data flow from the US and the Eurozone is quite relaxed this week, but the market will focus on a keynote speech by European Central Bank President Lagarde on Friday on the global economic outlook. In it, it is expected to address market doubts about the ECB’s ability to respond by 2023 before raising interest rates, as global inflation soars.

Sterling

Markets have largely ignored the political turmoil surrounding Boris Johnson’s staff coronation during the quarantine. Instead, they focused on strong November GDP data. Futures are already priced at four additional Bank of England raises during 2022, which largely explains the sterling rally so far this year. In a week full of key data releases in the UK, the market focus will be on inflation data, where we are once again expected to see a number above 5.0 in headline inflation. The labor market report will also be in focus, but will be overshadowed by the short-term effects of the Omicron-related constraints.

Euro

In a week without significant economic data, the euro fluctuated against the dollar, harmonizing with the other G10 currencies. This week’s program also looks relaxed, with one notable exception: President Lagarde’s speech on the global outlook on Friday. The gap between Lagarde’s timidity on the one hand and inflation and market expectations on the other is growing every week. We expect Mrs Lagarde to use this opportunity to clarify the ECB’s position on future interest rate hikes. We expect market volatility at the time of the speech and announcements.

Dollar

Although US inflation expectations are rising, the real figures are growing even faster. Nominal inflation in December was announced at 7% and is the highest in recent decades, while core inflation is not far behind and is at 5.5%. This week, it does not seem to have any heavy news in the US, as the Federal Reserve enters its quiet period in view of the January 26 meeting. The news so far for 2022 is the disconnect between the expectations for an increase in interest rates (where the market now expects increases in 2022) and the dollar, which continues to struggle against all its major bonds.

*Chief Risk Officer of the international payment company Ebury. The company’s analysts were named by Bloomberg in the first place of the most successful forecasts for the EUR / USD exchange rate in the fourth quarter of 2020.